Week ending 28th January 2022.

Uncertainty about how quickly the Fed will increase US interest rates, coupled with escalating geopolitical tensions over Ukraine, meant we had another extremely volatile (and dizzying) week as we experienced a number of very big back-and-forth intra-day movements.

For example, on Monday 24 January 2022, you would be forgiven for thinking it was a fairly unremarkable day given the US S&P500 index ended the day up just over 0.25%. However, given the index was down 4% at one point during the day, it actually ranks as one of the biggest market turnarounds in history!

Likewise, on Tuesday, the index was down 2.8% shortly after it opened, then made a full recovery only to give it up and end the day down over 1.2%. The early gains we saw on Wednesday (2.2%) and yesterday (1.8%) turned into a loss by the time the market closed, while today’s early losses (0.8%) reversed and then some, with the index ending the day up 2.43% – and in turn helping the index close the week with a gain of 0.77%.

This week’s Fed monetary policy meeting was important given how quickly and significantly interest rate expectations have changed since policymakers last met in mid-December.

As expected the Fed left US interest rates unchanged, and, as expected, the Fed chair Jay Powell signalled interest rates would be increased in March.

However, the statement and accompanying press conference was more hawkish than we would have liked as Jay Powell did nothing to dispel some of the recent market speculation, which suggests that we might well see a sharp increase in interest rates.

In fact, financial markets are now expecting (and therefore have already priced-in) five increases during the year, potentially starting with a 0.5% increase in March.

While we fully understand that the Fed needs to ensure financial markets have the confidence that they can and will bring inflation down to their 2% target, it is essential that policymakers remain open to scaling back planned increases if economic growth turns significantly lower (which we believe could happen if the Fed is too aggressive, especially given fiscal stimulus is set to fall and geopolitical risks are rising).

The other uncertainty keeping us awake at night right now is the developing crisis in Ukraine. As Russia is a large supplier of oil and gas (especially to Europe), an invasion by Russia and/or any sanctions placed on Russia could result in higher oil prices, which will add to the current inflationary pressures and further squeeze our disposable income – and consumer spending accounts for around 60% of the UK economy and two-thirds of the US economy.

As a consequence, we unfortunately don’t believe that this week’s equity market volatility will go away anytime soon – and while we fully understand and appreciate that any short-term volatility or negative news headlines can be unsettling, it was important to resist the urge for any knee-jerk reactions and instead maintain a long-term perspective as we are confident there is plenty of upside potential for global equity markets.

Looking ahead to this coming week, we have monetary policy meetings in the UK and Eurozone (and we would not be surprised if BoE policymakers increase UK interest rates by 0.25% to 0.5%). Elsewhere we have US ISM data; US employment data (non-farm payrolls; unemployment rate; participation rate; and average earnings); Eurozone CPI; and Chinese PMI.

Investment Management Team